Is There a Real Estate Allocation Puzzle?

摘要

The wide disagreement between academics and practitioners with regard to the optimal real estate allocation in the mixed-asset portfolio is a long standing puzzle. Extensive research focusing on "fine-tuning" the application of Modern Portfolio Theory (MPT) has been unable to reach any consensus. This article develops an alternative portfolio theory that extends the MPT to accommodate the unique characteristics such as (1) real estate is subject to significant liquidity risk, (2) real estate return distribution is not independent and identically-distributed, and (3) real estate has high transaction cost. Using real world data, the model produces optimal real estate allocation that is much lower than previously suggested by the literature and is in fact quite in line with the reality of institutional portfolios.